Foreign Exchange Option Pricing: A Practitioners Guide

This book covers foreign exchange options from the point of view of
the finance practitioner. It contains everything a quant or trader
working in a bank or hedge fund would need to know about the
mathematics of foreign exchange—not just the theoretical
mathematics covered in other books but also comprehensive coverage
of implementation, pricing and calibration.

With content developed with input from traders and with examples
using real-world data, this book introduces many of the more
commonly requested products from FX options trading desks, together
with the models that capture the risk characteristics necessary to
price these products accurately. Crucially, this book describes the
numerical methods required for calibration of these models –
an area often neglected in the literature, which is nevertheless of
paramount importance in practice. Thorough treatment is given in
one unified text to the following features:

Correct market conventions for FX volatility surface
construction

Adjustment for settlement and delayed delivery of options

Pricing of vanillas and barrier options under the volatility
smile

Barrier bending for limiting barrier discontinuity risk near
expiry

Industry strength partial differential equations in one and
several spatial variables using finite differences on nonuniform
grids

Fourier transform methods for pricing European options using
characteristic functions

Stochastic and local volatility models, and a mixed
stochastic/local volatility model

Three-factor long-dated FX model

Numerical calibration techniques for all the models in this
work

The augmented state variable approach for pricing strongly
path-dependent options using either partial differential equations
or Monte Carlo simulation

Connecting mathematically rigorous theory with practice, this is
the essential guide to foreign exchange options in the context of
the real financial marketplace.

Instructors

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